There are a number of reasons many of us would prefer that the 1970s remain a distant memory - ike disco, handle-bar mustaches, plaid sport jackets, and bell-bottoms. Lately, however, some concerns of that turbulent period have been making news again: higher oil prices, inflation, and even stagflation--prices rising while economic activity slows down. What is the outlook for inflation, and what should you do about it?
Inflation was up last year; there is no doubt about it. Gasoline and home heating oil are more expensive, rents are up, and health-care costs keep rising. If you take a step back, though, the differences between now and the 70s start to emerge pretty quickly. Not only was the inflation rate much higher then (the consumer price index rose 13.3% in 1979; in 2004, it rose 3.4%) it spread over every part of the economy. Now, prices for many consumer goods are stable, and others, like those for computers and DVD players, are falling. With all the incentives and competition among automakers, new cars are 4.3% cheaper now than they were in 1996.
There are ways to protect yourself and your family against whatever inflation does emerge in our lifetimes. Investing in stocks, especially through a tax-deferred investment account like an IRA (individual retirement account) or 401(k), historically has been a decent "hedge" against inflation, because companies raise prices as inflation rises, and their profits and stock prices have tended to go along for the ride.
Potentially even more effective is a tax-sheltered investment in some bonds issued by the U.S. government that guarantee a real return above whatever the inflation rate is: U.S. Treasury Inflation-Protected Securities, or TIPS. You can buy these bonds directly from the government, or invest in a mutual fund that owns them.
Copyright 2005 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.
